The Financial Services Authority (FSA) sent out a strong signal to companies handling client money that they should do so strictly within the rules.
JP Morgan Securities Ltd (JPMSL), a subsidiary of JP Morgan International Holdings, was fined Â£33.32 million for “failing to protect client money by segregation it properly”.
JPMSL failed to keep its clients’ money separate from its own for a period of nearly seven years between Nov 2002 and Jul 2009.
Under FSA rules clients’ funds, that is money usually in transition within the company but not owned by the company, must be kept in a separate fund under a trust. That means the money is held on trust by the company for the client. So should the company become insolvent, the clients’ money would be identifiable and be legally separate from the company’s money and liabilities. This is under Principle 10 of the FSA’s Principles of Business.
What JP Morgan Securities Ltd did was to keep the clients’ money held by its futures and options business with JP Morgan Chase Bank (JPMCB). It was therefore in a non-segregated account. Had the company gone bankrupt at any time the clients’ money could have been seized as part of the company’s assets to pay off liabilities.
The average amount of client money held in this non-segregated manner was $8.55 billion.
Although the FSA conceded that JPMSL did not do this deliberately and that they acted immediately to remedy the situation, the FSA still decided to apply a stiff fine. This may be because the company is a premier financial institution and one of the biggest holders of client money in the country. The company did work closely and constructively with the FSA to sort it out quickly so qualified for a 30% fine discount, otherwise the fine would have been Â£47.6 million.